Monday, November 21, 2011

Who Shredded My Cheese?

It is the “Game” and we are all players.

Once there was a company in Northeast Ohio that made vacuum cleaners.  Time after time the salary negotiations for the workers went something like this:

The Union:  “Give us more money and benefits or else!"

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!

The Company: “Okay, here you go.”

The union’s goal was to maximize the salary and benefits for its members.  The company played along and paid higher wages and benefits because it could raise prices and still make profits. 

But one day the salary negotiations went like this:

The Union:  “Give us more money and benefits or else!”

The Company:  “Or else, what?”

The Union: “Or else we will go on strike and you will have no vacuum cleaners to sell!”

The Company:  Sorry, you are not getting an increase.  In fact, this time you aren’t getting anything.  The Mexico plant can now make and assemble quality vacuum cleaners so we are expanding capacity there and closing this plant.

The Union:  “What?  Wait, why would you do that?  Okay, okay, let’s negotiate.” 

The Company:  “There is really nothing to negotiate.  You drove your compensation up so much over the years that it is three times higher than the Mexicans.  We can’t raise prices anymore because of increased competition.”

The Union: “But this is not fair.  You cannot do this!”

The Company:  “Oh yes we can.  Here we go. Adios.”

The company closed the plant and over a thousand workers lost their jobs.  Most of the people worked in assembly.  Many of them had worked for the company for over 20 years.

Unfortunately the skill these people had developed over the years was “vacuum cleaner assembly”.  In the new world economy, this is not a very valuable skill because Mexicans can assemble vacuum cleaners, Guatemalans can do it, and of course the Chinese. 

In this new world economy, you are not competing for work with the people in your city.  You are competing with everyone in the world.  It therefore is very important to have or be developing skills that are of increasing value in the world economy.

The people who assembled the vacuum cleaners were at one time winning the Game.  They had a marketable skill, but then the Game changed.  Somebody didn’t just move their cheese, they ground it up and scattered it around the world.

The “world economy” has had a significant impact on personal incomes in this country.  If you have a competitive skill, your value rises.  If you don’t, your value, and income, falls.  Even if you are not competing directly with foreign workers, you may be competing for domestic jobs with workers who have been displaced by foreign labor.    This means there is a surplus of workers for the “lower skill” positions and this drives salaries down.  As some workers rise up from the center and even more workers get pushed down from the center, the “middle class” shrinks.  Nobody caused this to happen, it’s the Game that changed and these are the results. 

Two weeks ago I said I supported the Occupy Wall Street protests because of legitimate outrage over unethical behavior of banks and financial firms.  However since then, OWS has taken a distinct “left-turn” and the focus has been on “income inequity”.  If this is now the rallying cry, it is no surprise the movement is producing more violence, more crime and basically more anarchy.

In a free-market economy there will always be income inequity.  The people who are risk takers, entrepreneurs and have exceptional skills will always be able to make more money than your average manual worker. The problem is that winning the Game has become tougher because the competition got larger, worldwide larger. Camping in the street and complaining about the Game may make you feel good, but it does nothing to change the rules of the Game, or to help you win it.  To win today, you have to work harder and the protesters don’t seem to want to do that.

And you may complain that the Game isn’t fair.  But guess what, few things in life are fair.  Today a baby will be born in Bangladesh and may not survive the week.  Another baby will be born in the Hamptons and will be wealthy his entire life.  The Game is not fair and sorry comrade, you cannot make it fair.  Karl Marx thought you could, but the reality is, that you can’t.

It doesn’t make sense to tax the successful people excessively and give the money to the least successful.  That would be punishing, not rewarding success.  In addition, the manager of this redistribution of wealth is Big Government, which means most of the new tax money will disappear down a rat hole.

However, our society must determine how much support the people at the top of the Game need to contribute to provide basic life services to the people that have been squeezed by the Game.  And due to changes in the Game caused by the world economy, they probably need to contribute more than they do now.  And you cannot ignore this issue.  Remember, the revolutions of the “Arab Spring” were all economic in nature and were a result of the people at the top hoarding too much of the wealth.  We must figure out a way to make the "new" Game work for everyone, but the solutions will not be easy.

Interesting Side Note:  The closed vacuum cleaner factory mentioned above was remodeled and is now used for light production and assembly work for several different companies.  A new company just rented space in the building to assemble, get this --- vacuum cleaners.  The product was previously assembled in China, but was redesigned to make assembly much easier.  This change made domestic assembly cost competitive so the vacuum cleaner will now be assembled here.  The jobs pay much less that the old jobs, but I would make the argument that the new jobs are paying the competitive wage for that skill, just as the old jobs paid the competitive wage at the time.    

Tuesday, November 8, 2011

Occupy This Thought

When there are people protesting in the street, something is wrong.

Last year people took to streets to protest the expansion of Big Government. Big Government growth had been a problem for years, but the increased spending and governmental intrusion of the new healthcare plan was enough to push people over the edge.

This protest became know as the Tea Party Movement (it’s a movement, not a political party!). The movement was very effective, working through the political system in stopping (maybe just slowing) the growth of Big Government and changing the attitude and actions of many politicians. It also raised awareness of the issue in the general population.

Now Occupy Wall Street has caused many people to protest what I will refer to as Big Money. While it is easy to criticize and any find reasons to discredit many facets of this movement, I repeat:

When there are people protesting in the street, something is wrong.

At first I thought of these people as misguided hippies who were acting very stupidly. Now no one dislikes hippies more than me (except Eric Cartman), but the protesters do have some legitimate concerns even if they have problems communicating them.

It took awhile to figure out, but the issues driving the protests are: The lack of accountability of banks/financial firms for causing the housing market/financial system collapse, the cozy relationship between Big Money and Big Government, and the growing inequality between the “rich and poor”. The first two issues are very valid. The third raises some complicated factors which I plan to address in a future post.

The main issue is that Big Money made billions promoting the use and abuse of sub-prime mortgages. It also used derivatives, insurance abuses and anything it could to exploit the situation. Corporate profits are good, corporate greed is bad. Remember greed is a sin, one of the seven “big ones” by the way. Sometimes profit and greed are divided by a thin, gray, line, but in this case Big Money went way over the line.

Sin always has a cost. In this case because of Big Money greed, millions of people lost their jobs, millions more are underemployed, many college graduates are working at Mc Donald’s and many people have lost their houses. And millions of unemployed people are still suffering from the sins of Big Money.

Taking in one step further, from lower wages and benefits, lower home values, lower stock values, higher taxes, etc., it is difficult to find someone who has not been negatively impacted by the Great Recession.

And what is the punishment for Big Money for being so irresponsible, for being so greedy? Not much. No one has gone to jail for their role in this fiasco. Remember that Bernie Madoff and the other Ponzi pals did not do anything to cause the financial crisis; their crimes were merely exposed by it. They were the super-greedy, so their penalties were either jail, or in one case suicide. Sometimes the wages of sin are indeed deadly.

Sure, some corporate CEO’s lost their jobs. They had to take their million dollar separation settlements and go sit idly by the pool. Ouch! That’ll teach ‘em.

So the banks took all these great financial risks. The banks raked in enormous profits. The executives all collected huge bonuses. And then it all fell apart and we all had to pay for it all through blood, sweat, tears and bailouts. But the bankers got to keep their big bonuses. It makes you so mad, so mad, that you just want to run out in the street and well, scream. Which I guess is the whole point.

This brings us to the friendly relationship between Big Money and Big Government. Big Government was way too willing to bailout Big Money and become its savior by paying for Big Money’s sins. Big Government was supposed to be watching Big Money, but it clearly saw what was happening and looked the other way.

Yes, this time Big Money was making so much big money that it had enough loot to buy off both the Democrats as well as the Republicans. We expect Big Money to buy off the Republicans and for the Democrats to serve as the watch dog. This time the watch dog had a big bone stuck in its mouth and did not bark.

I don’t know what the penalty should be for the people who caused the financial crisis at this point. The Democrats are now trying to punish Big Money for its actions, but that is resulting in the industry (even the banks that were “sinless”) having problems functioning effectively. And we need the financial system to heal and to be able to function well to get us out of this mess.

And then we read that not enough has been done to safeguard the system (still too big to fail!). More important than anything, laws should be written to ensure that this never, ever, comes close to happening again. Please use some common sense and just fix it! These guys were stealing cookies from the cookie jar, got caught, but received no penalty from grandma for doing so. What are the chances they will go for the cookies again since there were no consequences last time? We must make sure that grandma puts the cookies on the top self where Big Money can’t get them (joke to hockey fans, eh).

There are serious problems in how the Occupy Wall Street protesters are behaving. However peaceful, lawful, protests are protected by the First Amendment. You may disagree with their methods, their politics, etc, but on substance, in the words of that great philosopher M.C. Hammer: “Too legit, too legit to quit”